• Bank of America’s recent report reveals that investors have been increasing bond allocations and cash reserves in May, as they fear a possible recession.
• The Fed’s hawkish policy has been raising interest rates, prompting Ryan Payne to call the bond market a “dangerous place to be” at the moment.
• According to BofA survey respondents remain pessimistic about the market, yet hopeful for a soft landing.
Bond Allocations on the Rise
According to a recent report by Bank of America (BofA), apprehensive investors have been pumping their bond holdings in May, as well as cash reserves, fearful of a possible recession. Bonds are debt securities similar to an IOU issued by governments, municipalities or corporations to raise funds from investors willing to lend them money for some time. The May Global Fund Manager Survey revealed managers continue to increase their bond allocations up to 14% from 10% the month before -the highest allocation in 14 years- with retail money inflow being considered as another sign of forming a bond bubble.
Fed’s Hawkish Policy
Fed Chair Jerome Powell has been raising interest rates up to 5% in 10 consecutive revisions since Q2 2022 with the latest hike in Q1 2023. This prompted Ryan Payne, President of Payne Capital Management (PCM) ,to comment on the danger of following the herd and investing in bonds during an interview with Reuters. He mentions that so far this year 25% of all bond inflows happened within 10 months thus indicating a potential bubble formation due to big retail money inflow going into bonds specifically.
Survey Results
The same survey also showed that despite 65% expecting weaker global growth -up from 63%- 63% believe it will be followed by a soft landing period characterized by moderate economic slowdown after growth period ends. The survey was based on responses from 289 fund managers overseeing $735 billion assets worldwide .
Conclusion
It is clear that people are wary about what may come next leading them towards safe investments such as bonds but this could potentially lead us towards dangerous territory considering how much money has already gone into bonds and cash reserves over the past ten months according to BofA reports . Although we cannot predict where this will end up we must keep our eyes open for signs of bubbles forming and take necessary precautions if needed .
Takeaways
• Bonds and cash reserves are on the rise due to fears of recession according to Bank of America report
• Fed chair Jerome Powell has raised interest rates up 5%, causing concern among investors • BofA survey respondents remain pessimistic yet hopeful for soft landing